High taxes and ineffective government policies ruin telecoms, says GSMA

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High taxes and ineffective government policies ruin telecoms, says GSMA
High taxes and ineffective government policies ruin telecoms, says GSMA

The Global Mobile Industry Association (GSMA) expresses concern that Digital Pakistan may not be realized in the current market and regulatory environment and in light of recent macroeconomic developments.

A recent report by the Association on Pakistan, titled Making Digital Pakistan a Reality, stated that the aggregate mobile ARPU in the country is now below $1, one of the lowest rates in the world (the global average is $8). As a result of flood-related disruptions to food supply chains and challenging global financial conditions, Pakistan’s annual inflation rate reached more than 27 percent in August 2022 (the highest in 47 years).

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Increasing operating costs (partly due to currency depreciation and higher energy prices) and inflationary effects on consumer spending (including on telecoms services) affect the industry’s economic health.

In the first quarter of 2022, two mobile operators suffered combined losses of around Rs. 50 billion ($226 million), while Jazz has recently reported four consecutive quarters of negative growth for foreign investors.

It should be noted that Pakistan is still lagging behind its peers in South Asia on several indicators of mobile internet adoption and usage. The country is significantly underserved by mobile internet coverage, as well as by usage, highlighting the scale of non-infrastructure barriers to the adoption and use of mobile internet.

Among the highest taxes in the world are those levied on service providers, consumer devices, and services in Pakistan, according to the report. A number of these taxes, some of which are sector-specific, negatively impact network investment affordability, especially for the most vulnerable members of society. In order to enable more low-income households to participate in the digital economy, policymakers should slowly eliminate the 15 percent Advance Income Tax (AIT) on essential telecommunications services and the 19.5 percent mobile service sales tax, which create additional barriers to digital inclusion.

In terms of the opportunity cost of the amount deposited, cash margins increase the cost of imports. Therefore, the requirement of a 100 percent cash margin for telecom equipment imports imposed by the SBP should be removed in order to prevent jeopardizing current and future network expansion. There should also be a reduction in the customs duties on batteries used in renewable energy systems and optical fibre equipment.

There should be a reversal of the increase in the regulatory duty on optical fibre imports from 10 percent to 20 percent in the Finance Bill 2022 in order to sustain investment in fiber deployment.

The government unveiled a three-year spectrum strategy in 2020. In spite of this, the short duration does not provide investors with the necessary visibility. If the industry could develop a clear, long-term roadmap of at least five years, it would be more likely to attract capital for infrastructure development.

In addition, denominating spectrum fees in US dollars exposes the operators to significant currency devaluation risks, since depreciation of the local currency results in higher spectrum fees in US dollars. In the long run, the unpredictability of currency values impacts business plans and ultimately affects company revenue and consumer prices.

As a result, policymakers should consider denominating spectrum payments in local currency, which would provide greater certainty for operators since revenue is also earned in local currency.

Considering telecommunications a necessity rather than a luxury, policymakers should take steps to implement the industry status granted to the sector in terms of energy tariffs.

It is possible for operators to channel savings into investing in network infrastructure and providing better services by lowering energy costs. By implementing the ‘industry’ status as approved by the Finance Bill 2021, investor confidence in local policies will also be enhanced.

To mitigate economic pressures and spur long-term planning in light of the challenging operating environment, including forex and inflationary headwinds, policymakers should consider the following measures:

  •  To mitigate currency risk and remove uncertainty in business planning, the foreign exchange rate for license-fee payment should be reviewed and frozen.
  • Provide much-needed fiscal space and ease cash flow pressures by staggered licensing fee payments over a period of 10 years.
  • Consider a moratorium on the rollout of the Universal Service Funds (USFs) and contributions to research and development (R&D).

Digital Pakistan was identified in the report as the flagship initiative of the government of Pakistan in order to expand the knowledge-based economy and spur socio-economic growth through the use of digital technologies. In order for Digital Pakistan to be implemented, the mobile industry plays a crucial role in driving digital transformation.

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Mobile industry players must be able to roll out the necessary digital infrastructure and innovative services to bridge the digital divide and accelerate adoption of digital solutions in order to continue on this path. For this to be achieved, however, a whole-of-government approach (WGA) is necessary to address the headwinds that could undermine the economic health of industry players and their ability to contribute to socioeconomic development.

Policymakers in Pakistan have the opportunity to accelerate progress with Digital Pakistan and lay a strong foundation for 5G. Using a WGA, key reforms can be implemented to enhance the financial health of the overall telecoms sector and the ability of industry participants to invest and innovate. There is a need for urgent attention in the following areas.

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